To assist self-employed and freelance workers getting ready to file self-assessment tax returns this month, Jonathan Amponsah, co-founder of tax return app Easy Tax Returns, reveals ten common tax return mistakes to help small business owners avoid an unwanted visit from HMRC.
January 31 is looming – and if you haven’t already filed your self-assessment tax return, then it’s time to get started. Late filing can result in hefty fines.
But it’s not just being late that can lead to a nasty letter from HMRC or a request for additional money to cover interest and a fine. In my experience, there are ten classic mistakes that people make on their tax return.
These mistakes, however innocent, can lead to additional enquiries and even investigations by HMRC. At the very least they may mean that you pay too much tax or a refund is delayed.
1. Forgetting to include all sources of income
In the rush for January, it’s easy to forget income sources, such as interest being received in the year.
However, HMRC knows if you have an interest earning account or perhaps an offshore bank account. So, they will be asking: “Is this where you have filtered away undeclared profits?”.
This will trigger an investigation, which can be time consuming and costly.
2. Not using the white space to explain unusual variations
If you know there is something unusual, explain it.
HMRC is then far less likely to start an enquiry. It is crucial that you or your accountant do this, although often it doesn’t seem to happen especially if your accountant is snowed under with lots of last minute returns to prepare.
For instance, if your net profit seems too low to support someone above the poverty line, be prepared for give a plausible explanation.
However, there’s no need to go overboard or be over generous in the information you give. Keep it straight, honest and simple.
Also, make sure you do a reasonableness check. If your final tax is a lot more or a lot less than you expected, then this is a sign that something may have been entered incorrectly. Unless you’re able to put a finger on the reason why, you need to go back and double check.
3. Entering the same expenses in different boxes each year
In their haste to get the return filed, many taxpayers and sometimes even their accountants do misclassify the expenses on the return.
For example, a driving instructor putting their fuel cost in the cost of sales figure one year and then in motor expenses the next, will produce large variations that the computer will want further explanations for.
4. Entering “yes” between questions one to nine on page two of the tax return but not forwarding the supplementary pages to HMRC
This is a common mistake with manual, paper filing. If you are filing online then this will be picked up by the checks the programme carries out.
Also, don’t simply say “as per accounts” or “more information to follow”. You have to send the relevant information with your return. You might think the taxman already knows it and can look it up, but that’s not the way the tax calculation programme works. You simply have to supply the info in the boxes as required.
5. Claiming for expenses that cannot be claimed
The rules on what expenses can/cannot be claimed is not as straight forward as you may think. You should proceed with care or appoint a good accountant or tax adviser.
For instance, you might assume that an actor who rented accommodation in Scotland during a film shoot for his business could claim the cost of the accommodation against his income, right? Wrong. HMRC denied the expenses and won the Court case. It was decided that the expenses did not meet the so called “wholly and exclusively for the purpose trade” test.
In addition there are certain areas to be aware of. These “hot spot” areas tend to attract more attention than others. HMRC knows that enquiries into the following expenditure areas are likely to produce some interesting results:
- Legal and professional expenses
- Repairs and renewals
- Provisions and accruals
- Research and development
- Employment expense
- Termination payments
The taxman has been known to raise more enquiries into the above expenses than any other areas. For instance, where drawings are comparatively low, HMRC may wonder whether there have been undeclared cash sales which have been used to fund your living expenses.
Knowing the rules on the other expense categories will ensure that any questions do not lead to a full blown, and very costly investigation.
6. Using estimates and round sum figures on the return
This will fuel the taxman’s suspicion that you do not keep proper records and will be used as a basis to ask for evidence to substantiate the amounts on the return.
If the taxman can show that balancing figures or estimates have been used or that there are no invoices for some of the expenses, then he will tend to take this as carte blanche to propose hefty additions to taxable profits, often based on nothing more than a finger in the air.
7. Not showing private use adjustments separately on the self-employment pages
HMRC will always be looking to disallow any private use of items. So where you have already restricted say motor expenses for private use, you will avoid questions if you show the adjustments separately rather than netting it off so that it’s clear to the taxman that adjustments have been made.
8. Forgetting to add Class 2 NIC to the tax bill
This is a new requirement so remember to include your Class 2 NIC on your return if you are self-employed and are required to pay it or have opted to pay it.
9. Forgetting about Foreign Income
This is huge and one of the most common tax return mistakes.
Foreign Income was such a frequent oversight that the law was changed to make this error a criminal offence. Proceed carefully and use a checklist to ensure nothing gets missed or go through HMRC’s 12 points on “who must send in a tax return” to prompt you to include any foreign income you may have.
Alternatively, instruct a professional to ensure you get it right.
10.Not seeking help to avoid tax return mistakes
HMRC campaigns tell us that “tax doesn’t have to be taxing”. However, the task of completing your taxes cannot always be considered straightforward. And if you get it wrong it can lead to an unfriendly letter from HMRC.
My advice is to seek help if you’re unsure. If you feel confident, then yes, you can certainly do it yourself and use HMRC’s site or other online platforms.
Alternatively, take your records to an accountant, post them, or use an online app where you can handover your tax return to a professional and remove the risk of tax penalties.
And if you decide to give it a go yourself, do take extra care, use a checklist and don’t leave it to the last minute.